Mutual-fund mixes bonds, commodities, currencies

MurrayColeman

SAN FRANCISCO (MarketWatch) - A new mutual-fund investing in a wide swath of currencies, bonds and commodities promises to give individual investors access to sophisticated risk-control strategies most familiar to institutions.

The Rydex Managed Futures Fund
RYMFX, -4.48%
can also sell its holdings short as well as take more traditional long positions.

Rival mutual funds and exchange-traded funds combine some of the same asset classes as the new fund, says Edward Egilinsky, Rydex's managing director of alternative investments. "But this is the first of its kind for an investor to get highly diversified exposure to managed futures in an open-end mutual fund structure," he added.

It's the type of fund normally only available to endowments, retirement plans and high net-worth investors through either futures trading accounts or pooled commodity accounts.

'Rydex is trying to bring a very sophisticated trading strategy to the retail marketplace. If they can prove it can work in a mutual-fund format, I'll definitely take my hat off to them. It could be another very interesting tool for individual portfolios.'
JoycePayne Partners' Jack Payne

"Rydex is trying to bring a very sophisticated trading strategy to the retail marketplace," Jack Payne, chief investment officer at Richmond, Va.-based JoycePayne Partners, said. "If they can prove it can work in a mutual-fund format, I'll definitely take my hat off to them. It could be another very interesting tool for individual portfolios."

The Rydex fund is based on Standard & Poor's Diversified Trends Indicator. It includes 14 different sectors and breaks assets in half between physical assets and fixed income.

Its biggest category is energy at 18.5% of assets. Other physical commodities include grains (11.5%), industrial metals (5%), precious metals (5.25%) and livestock (5%). Soft commodities ranging from coffee to sugar and cotton (4.5%) make up the group's remaining half.

The other 50% of the fund's assets go into currencies. Contracts representing a sprinkling of Australian and Canadian dollars go into the portfolio, along with the British pound and Swiss Franc. The biggest allocations go to the euro (13%) and yen (12%).

The other components of the fund's makeup are U.S. 10-year Treasury bonds (7.5%) and two-year U.S. Treasury notes (2.5%).

The index is rebalanced monthly. Weightings were determined by factors such as worldwide commodities production and liquidity averages for different types of futures contracts.

Currencies and fixed income levels were set by gross domestic production patterns and similar liquidity measures, according to Egilinsky.

"An investment's price is directly tied to the underlying indicator, which is the benchmark," Egilinsky said. "It allows the fund to give you the return of the benchmark without actually using futures contracts."

The benchmark also looks at each individual sector on a rolling seven-month period. "If the current price is higher than that longer-term moving average, then the fund will go long in that sector for that month," Egilinsky said. "If the current price is below that moving seven-month average, it goes short for that month."

It's similar to strategies futures traders use in terms of implementing a computer-driven, trend-following approach, he added.

"Nobody's going to look at managed futures as a standalone vehicle, but over time it can reduce volatility of an investor's core portfolio holdings," Egilinsky said.

Rydex says back-tested returns for its newest fund show that over long periods it should zig when stocks zag. It also should produce slightly greater swings than bonds. But performance based on historic returns for all asset classes in the fund indicates greater profits for investors, Egilinsky says.

"The key point is that we're not replacing stocks and bonds," Egilinsky said. "These types of alternative investments over time have no correlation to stocks and bonds."

In the past, money manager Payne has been putting high net-worth clients into managed futures accounts through an institutional investment firm.

Wait and see

Like Nusbaum in Arizona, he's holding off right now on switching to the Rydex fund. Both are taking a wait and see attitude. But they're each also closely watching its performance, particularly in smaller portfolios where consolidating alternative investments into one all-purpose fund makes sense.

"Rydex is essentially using the same strategy with this fund as most commodity trading advisers serving institutional investors do," Payne said.

Futures markets are more driven by supply and demand than stocks as a whole, he added.

At 1.65% annual expense ratio, Payne says Rydex's new fund is "right in the ballpark of what institutional managers charge to do the same sort of thing."

The new fund isn't without risks, however. Payne cites potentially high turnover rates as one. That means trading costs outside of annual fund administration expenses could add up quickly, he says. "This fund is probably going to be most appropriate for tax-sheltered accounts," he added.

Since the fund uses structured notes issued by outside underwriters and financial institutions rather than buying futures contracts directly, Payne says that liquidity could come into play.

"But these are fairly deep markets they're investing in," he said. "And the fund is so well-diversified that it probably won't be an issue in practical terms."

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